Investing.com -- Shares of TietoEVRY (HE:TIETO) and Alten (EPA:LTEN) were down on Monday following downgrades by analysts at BofA Securities, reflecting deepening concerns about their growth prospects amid ongoing weakness in key end markets within the European IT services sector.
At 5:27 am (0927 GMT), Alten and TietoEVRY were trading lower at 4.8% and 4.4%, respectively.
BofA has downgraded Alten to "underperform," citing persistent headwinds due to a slowdown in essential markets that account for two-thirds of its revenues.
These sectors, particularly automotive, aerospace, and life sciences, are facing significant challenges, as evidenced by recent profit warnings from major European automotive manufacturers such as Stellantis (NYSE:STLA), Volkswagen (ETR:VOWG_p), Daimler (OTC:MBGAF), and BMW (ETR:BMWG).
The aerospace sector is similarly strained, largely due to ongoing supply chain disruptions at Airbus. Furthermore, pressure on IT budgets in retail and public sectors has compounded the challenges faced by Alten, with analysts noting that discretionary IT spending remains muted.
In light of these factors, BofA has revised Alten's financial outlook, lowering its 2024 and 2025 organic growth estimates from 0.9% and 3% to flat and 2%, respectively.
These projections now sit 2% to 3% below consensus revenue expectations for those years. The expected organic revenue decline for the third quarter and fourth quarter is projected at -0.9% and -0.8%, respectively, compared to a slight growth of 1.0% in the second quarter.
Analysts flagged that Alten's operational strategy, which aims to double offshore development capacity, poses execution risks and requires additional investments that could further pressure margins.
BofA's report indicates that while Alten retains a strong position in engineering R&D services, the near-term growth outlook is clouded by low visibility on demand recovery.
Alten shares, having dropped 28% year-to-date, are now trading at a 28% discount to their five-year median P/E ratio. BofA has set a new price objective of €92, down from €125, suggesting a potential downside of around 5% based on a 12x P/E multiple for 2025, reflecting the weakened growth outlook.
Similarly, TietoEVRY has also been downgraded to "underperform" due to the weak end-market trends that are likely to lead to further cuts in its fiscal year guidance.
BofA analysts forecast a soft average organic growth rate of -1.5% for the European IT services sector in the third quarter, a slight improvement from earlier quarters but still indicative of ongoing challenges.
They pointed out that the slowdown in public sector spending in the UK and France, coupled with uncertainty surrounding budget allocations, is likely to delay the recovery of project-based and discretionary IT spending into the first half of 2025.
BofA has reduced TietoEVRY's 2024 organic growth estimate from -0.2% to -1.1% and adjusted its EBITA margins slightly downward to 12.6%.
As a result, the brokerage has cut its adjusted earnings per share estimates for 2024 and 2025 by approximately 3% and 6%, respectively.
The new price objective for TietoEVRY is set at €18, down from €20, implying zero upside potential based on an unchanged P/E multiple of 8.5x for 2025.